We don’t know your current financial situation and it’s not important right now. Let’s talk about what your situation with money is.
You could be battling to pay your monthly bills, living salary to salary, fully aware of your discomfort.
Perhaps you’re in a relationship, and you enjoy a dual salary with limited monthly expenses as a couple and reckon you’re ‘coining’ it.
Alternatively, you could be financially oblivious as to what goes on within your bank account (think Jon), and not consciously aware of your personal finances. They’re in the background. That’s not a good place to be.
In this day and age of credit cards and lines of credit, it’s easy to have your finances go astray in the mire of rolling pay days, overdrafts and minimum payments on credit cards. On the surface, things look peachy, while you slowly and unwittingly, like a frog in a pot of water, accumulate debt.
Your particular monthly result can be thought of as the difference between what you earn and what you spend. It’s what’s left at the end of the month, or what’s not left (debt). So we’ll call it the ‘difference’. If you tend to run out of money near the end of the month, and perhaps you’re completely cleared out by payday, then we really need to have a little talk, because you’re just not going to be able to sustain that in the medium and long term. Fortunately, we have a plan.
If you don’t know whether you end up under or over at the end of the month, we’re telling you now that you need to work it out.
If you feel that knowing what your difference is applies only to people with a negative result and you’re pretty sure that your presumed monthly surplus absolves you from this exercise – we’ll explain why you need to lose that attitude. This is the article chock-full of tough love folks.
However! We’re willing to bet a copy of Your Money or Your Life that what you think your result will be and what it will be, are two totally different numbers.
For the first time in this series of articles, we’re asking you to depart from the more philosophical side to personal finance and money, and prepare yourself for some practical homework (please don’t stop reading).
We understand this is not particularly appealing to everyone, but take our word for it, you will come to realise that knowing where your money goes is one of the most important steps in taking charge of your financial future. Really. Take our word for it. We have postgraduate degrees and excellent hair.
The intention is not only to arrive at a numerical picture of your difference, it’s about allowing you to recognise your spending habits; a precursor to discovering your relationship with money.
The first step in most twelve-step programs is admitting that you were powerless over your addiction and that things had become unmanageable.
Arriving at the bleak conclusion that, financially speaking, you’re potentially worth less than zero is not fun. But until you can see and comprehend how the indisputable laws of primary school maths mean that your current course is unsustainable, your situation will never change.
Can we add a further quick cautionary note? We don’t want you to hit rock bottom before you realise that something needs to be done. There’s nothing romantic about that, and as far as personal accounts of your financial journey go, rags to riches stories are overrated. Don’t be fooled into thinking that there is plenty more time to make more money and that you can sort it out next year. Next year the problem will be bigger and harder, and who knows what additional challenges you may be facing.
Remember how we told you that nobody was going to care more about your financial wellbeing than you do? Well, that applies now.
If you’re not battling month-to-month to manage your cash flow and you have a surplus (or think you do), to make that surplus work, you need to know what you have to work with (you’ll definitely want to do something with it by the time you’re finished reading this series of articles). Are we talking several hundred rands or several thousand rands? All amounts are meaningful, but you’ll need to know what you might be able to commit to achieving your goals.
In our article about setting personal finance goals we mentioned that you might not yet be in a position to set goals, and that perhaps later on, more obvious goals requiring attention might come to mind. Perhaps now, committing to successfully tracking your spending and witnessing your potential shortcomings or successes (it’s not all doom and gloom in the personal finance world), and balancing your income and expenses, could become a meaningful goal for your to acquire.
With many goals competing for limited resources (likely cash), tracking your spending will allow you to see what resources are available for allocation to the things that matter to you.
By tracking your cash flow, the hope is also that you’ll start to see money as more of a commodity or a tool and not something that reigns over you, thinking that money solves more than just financial problems.
We’ll touch on some of the ways in which you can accurately track your spending in our next article. For now, our job was to try and get you to buy into the idea of doing this exercise at all. We hope we’ve convinced you to give it a try.
“The cost of being wrong is less than the cost of doing nothing” – Seth Godin
In addition, we’ll soon ask that you draw up a budget. If you don’t know where your money is going, you won’t be able to do that. Don’t disregard this step because you don’t feel like you’re the ‘budgeting kind’ and that this doesn’t apply to you. We’ll ask that you draw up a budget if only once in your life; however, you won’t need to pour over it daily.
But don’t fret, we’ll get there.
For now, you need to mentally prepare to dissect your spending.